Questions that are rarely asked

Another consistency question: can you simultaneously believe that minimum wages have small disemployment effects (implying inelastic demand for labor) and that higher immigration has small negative wage effects (implying elastic demand for labor). Sign me up for relatively elastic demand for labor (in the long run) – that’s why I support immigration and am skeptical about min wage!

This can be consistent with elastic labour demand: a rise in wages causes a large fall in labour demand, but at the bottom end, this effect is swamped by the decline in employee turnover and the easier retention of high-quality employees (low-quality employees are unambiguously expelled from the labour market; the C+K employment effect is merely that high-quality employees spend less time in search).

JWattsFebruary 22, 2013 at 1:53 pm

“that’s why I support immigration”

Support for immigrations is nuanced and varied. Personally, I think the US should actively encourage high skilled immigration. Particularly with regards to the foreign students obtaining degrees in US schools.

I don’t understand, however, the support for low skilled immigration combined with the extisting extensive welfare state? It seems like all the realistic analysis’s (not cherry picked to arrive at a foregone conclusion) provide evidence that your average low skilled immigrant with an average family is a net loss in taxes and may well be a complete economic net loss.

maveryFebruary 22, 2013 at 2:01 pm

Regarding your second point, it depends highly on the time frame you want to look at.

I mean, hell, if you wanted to do it as an economic calculation, I bet you’d find the same net return if you looked at similarly-poor American families. Now, you can argue that there’s a difference between folks who are American by birth and folks who want to be American so much they moved here, and we should therefore treat them differently. But that’s the argument you need to be making rather than the short-term net effect on the government’s balance sheet of a poor family.

NPWFebruary 22, 2013 at 2:57 pm

“Now, you can argue that there’s a difference between folks who are American by birth and folks who want to be American so much they moved here, and we should therefore treat them differently. But that’s the argument you need to be making rather than the short-term net effect on the government’s balance sheet of a poor family.”

The difference is that we can by international law prevent immigration of a net loss, whereas, expelling a net loss is less feasible. Claiming equal economic value between two units, one endemic and the other foreign, does not lead to the conclusion that “treating them differently” should be part of the discussion.

I’m not convinced that the US should reject people based on their earning potential, but treating people who are actively breaking the law of the nation where they want to become citizens versus those who are not breaking the law seems self-recommending.

Regardless, the idea that the US taxpayer’s responsibility to the world’s poor == to native born poor is legitimately questionable.

RichFebruary 22, 2013 at 3:03 pm

I’m too lazy to do the research, so I was hoping someone would help me figure out what is wrong with this analysis. According to one internet source, total government spending (federal, state and local) per capita is about $20,000 ($19,824) per year. If we assume that individuals work about half of their lives, anyone who pays (or is responsible for) less than about $40,000 in taxes for each year that they are working is a net drain on the public fisc. In other words, the overwhelming majority of us are drains on the public fisc – that is the consequence of a highly skewed income distribution and redistributive programs. But that shouldn’t make us indifferent toward letting in more people who are drains on the fisc as this reduces the amount of wealth that can be redistributed to the rest of us.

Of course, the $40,000 in taxes per year is just a rough approximation. About $2,800 of the government spending is for defense, and some of the other spending may be for public goods as well. Moreover, it may be that much of the spending is concentrated on a few individuals (e.g. criminals or special needs students). I have no idea as to whether immigrants use a disproportionately high or low amount of government services. It may also be the case that immigrants can make the rest of us more productive. Finally, if much of our need for government spending is concentrated in our later years (social security, medicaid), a substantial increase in the population can keep the fisc solvent as long as we keep growing at a sufficiently high rate. Even Ponzi schemes can work if you keep adding new suckers.

FinchFebruary 22, 2013 at 4:49 pm

I’m not sure about the precise numbers, but the general idea seems sound. Another way to look at it is that since we’re running a deficit, the average taxpayer is a net loss to the government, and because the tax code is strongly progressive and there is income inequality, the median taxpayer must be a significantly greater drain than the average. This leaves out time-value-of-money, which may be significant if expenses and revenues happen at different points in time. This is also from the government’s perspective, and isn’t exactly the same as the economy’s perspective, which might still be a win at a somewhat lower income than the ~$200k/year income you calculate. I’m not entirely sure how you’d do the calculation from the economy’s perspective.

gFebruary 22, 2013 at 6:56 pm

“the average taxpayer is a net loss to the government”

But that does not necessarily mean that marginal cost to the government of an additional taxpayer is negative.

FinchFebruary 22, 2013 at 9:10 pm

Because, for example, adding one person doesn’t require increasing the defense budget by 1/300,000,000th? I suppose so, but most of the cost is social programs, right? And those grow pretty much linearly with population. Did you mean something more by that? I’m not sure I understand.

James HerbstFebruary 23, 2013 at 5:50 pm

Finch: most of the cost, and, in particular, most of the expected future deficit, comes from expenditures on old people. Immigrants are, for the most part, young people.

FinchFebruary 24, 2013 at 12:33 pm

I was not aware they would never become old people. Clearly, that changes things.

Rich’s calculation attempted to annualize things, and if you really wanted to do this, you’d need to do a NPV. But I think his point is still basically correct. For the government, it’s not even close: You have to be a very high earner to have a positive budget impact. Everybody else is a drain. FWIW, I think this says something more negative about how we conduct our government than it does about people. We could run the country so that ordinary people had a positive impact. We would need to do so be lowering the costs of their existence to be commensurate with their lower contribution.

TheAJFebruary 22, 2013 at 2:56 pm

Personally, I think the US should actively encourage high skilled immigration.

High skilled people don’t think so. And because high-skilled people control policy, it does not happen. When’s the last time you heard a doctor say that they are overpaid? Or a lawyer? Or a CEO? Instead its only the poor who are always overpaid and should be compensated with substinence wages, and the rich who are underpaid and not properly compensated for their so called value add.

Kevin C.February 23, 2013 at 2:33 am

“I don’t understand, however, the support for low skilled immigration combined with the extisting extensive welfare state? It seems like all the realistic analysis’s (not cherry picked to arrive at a foregone conclusion) provide evidence that your average low skilled immigrant with an average family is a net loss in taxes and may well be a complete economic net loss.”

What’s so hard to understand; the party supporting and providing the welfare gets a new stream of loyal voters, ensuring they stay in power, and the rival party loses more and more. So what if there’s an economic net loss? Recall the iron law of institutions: “The people who control institutions care first and foremost about their power within the institution rather than the power of the institution itself. Thus, they would rather the institution ‘fail’ while they remain in power within the institution than for the institution to ‘succeed’ if that requires them to lose power within the institution.”

Thus, politicians will choose any action, no matter how harmful to the nation, so long as it improves their ability to win elections. Thus, the actions by one party to “elect a new people”, no matter the cost.

Tom WestFebruary 23, 2013 at 11:20 am

> iron law of institutions

Amazing how we and almost everyone we know are fairly reasonable decent folk who for the most part take their responsibilities seriously, yet there seems to be an almost boundless group of sociopathic power-mongerers who seem to magically be in control of all our institutions.

Institutions are made of people, and if you and the people you know are pretty reasonable, then empirically the odds are high that the people who make up institutions are pretty reasonable as well.

ladderffFebruary 23, 2013 at 12:09 pm

Thanks Tom; I feel better now.

Go Kings, Go!February 23, 2013 at 2:01 pm

Amazing how we [politicians] and almost everyone we know [amongst the media, bureaucrats, think tanks, aides and university auxiliaries] are fairly reasonable decent folk who for the most part take their responsibilities seriously, yet there seems to be an almost boundless group of sociopathic power-mongerers [in the private economy] who seem to magically be in control of all our institutions [that allocate income and wealth, disseminate vulgar and violent culture, condone unreasonable beliefs, and deliver bad things (e.g., guns, Ding Dongs)].

Tom WestFebruary 23, 2013 at 5:35 pm

I think it’s quite obvious that tendency to assume the worst of people we don’t know when all the evidence is that we’re just people is not confined to either the right or left. It’s a regrettable fallacy that tempts all of us at times.

I will admit that I did find the fact that something as irrational but attractive as the “Iron Rule of Institutions” was a reference to a site called “rationalwiki.org”. Just a little too ironic for me to be able stop myself from commenting :-).

BrianFebruary 22, 2013 at 2:52 pm

The Left is supported by Unions first (who favor the minimum wage to prevent competition), and then immigrants. Maybe this question is “rarely” asked, but the tension within the party, which is its manifestation, is obvious. Moreover, analysts cite the role of immigrants as a large factor in tipping the balance in the most recent national election, and so that tent can ill afford to lose this group as a whole. The Right has a bird in hand if they just listen to their libertarian cohort, and support free movement of labor and open borders. Until they realize this, the Left can continue to treat this lower tier member of its coalition as sheep (as they also are currently doing with the doves and peace activists) since there is no better alternative. These cacophonous positions within the party can thus persist.

The Right has a bird in hand if they just listen to their libertarian cohort, and support free movement of labor and open borders.

Immigration is political and cultural suicide for US libertarians, much less US conservatives.

j rFebruary 22, 2013 at 5:06 pm

Can you expand upon your mixed metaphor? What does it mean for culture to kill itself? Or is this just another one of those “brown people can’t understand limited government” arguments?

Tom WestFebruary 23, 2013 at 11:25 am

> Or is this just another one of those “brown people can’t understand limited government” arguments?

If I’ve read Anti-Gnostic correctly, I’d wager “yes”.

However, they’re likely sharing the tent with women and the poor.

Go Kings, GoQFebruary 23, 2013 at 2:10 pm

Or maybe, immigrants from countries soaked in religious/cultural/political communitarianism (i.e., brown, olive-white people) will hurt libertarians, but immigrants from countries soaked in cultural/political each-man-for-himselfism (i.e., yellow, black, pasty-white people) might be amenable to libertarians? I dunno enough to assert that, but Chinese, Africans and Nordic/UK immigrants seem to be high achievers in free markets and Mexicans, Italians seem to be high achievers in politics.

maguroFebruary 22, 2013 at 4:13 pm

But why do immigrants support the Left? Because of amnesty/open borders alone? No. Because they want more socialism, mostly. There’s lots of polling data to support that, too, see Plouffe’s recent comments.

Bringing in millions of new leftist immigrants just doesn’t seem like a big win for the Right to me.

JanFebruary 22, 2013 at 6:41 pm

For what it’s worth, most first generation immigrants that I know actually lean right. These are people who are here legally (as far as I know) and are basically achieving the American dream. Many of my friends and coworkers are the sons and daughters of these immigrants, and this second generation are the ones who are more likely to support freer immigration. According to their parents, they got in while the gettin’ was good and too bad for everyone else waiting at the gate.

Maybe the more recent waves of illegal Latino immigrants–not well represented in my social sample–are the “socialists.”

byomtovFebruary 23, 2013 at 1:38 pm

Amazing.

All those socialist immigrants are out picking crops, doing construction, and otherwise making low wages at hard physical labor, while the driving, entrepreneurial, self-reliant, free-market John Galt types are drawing their regular paychecks from a state-funded university and spend their time pontificating about the world.

maguroFebruary 23, 2013 at 8:08 pm

Hey, chump. We are talking about whether more immigration is good for “the Right” politically, not whether Jose the raspberry picker is a harder working, more admirable human being than I am. Maybe he is, maybe he isn’t, but that’s beside the point. I am just saying that the arrival of more Joses is a bad thing for the Right politically, which it manifestly is.

If you assume the Lump of labour fallacy is indeed a fallacy then won’t aggregate demand increase as the labor force increases leaving unemployment and wages relatively unchanged. Of course this assumes an inflow that reflects the distribution of US workers and that it is constant and somewhat predictable so that new capital can constantly be invested to allow new workers to be equally productive to their native counterparts. An elastic vs inelastic demand for labor would appear to make a difference in unemployment regardless of immigration level.

I was wondering though: An indication of the affordability of the real minimum wage can be taken by:

Affordability = real min wage / real gdp per capita

(A lower number means it is more affordable.)

In the late 1960s it was around $9.00 – $10.00 (2012 $). It peaked at $10.50

GDP per capita is about double what it was then. Doesn’t that imply that if anything it should be $20 and that $10 is eminently affordable? Or would you not say that increases in real GDP per Capita do not imply a higher capacity to pay a higher real minimum wage. This is even more strange given that productivity of people at the bottom (retail) has shot up since the late 1960s. Think of self checkout for example.

The flip side of this question is how CEOs and executives manage to maintain ‘full employment’ despite their ultra high real wages compared to GDP per Capita. Do the elite today return a better value than 40 years ago?

Andrew'February 22, 2013 at 4:23 pm

Would this argument imply that we could afford to quadruple the price of food?

RayFebruary 23, 2013 at 1:58 am

Andrew’, I am not really sure I understand your point.

Tom WestFebruary 23, 2013 at 5:38 pm

The flip side of this question is how CEOs and executives manage to maintain ‘full employment’ despite their ultra high real wages compared to GDP per Capita.

Do they really? I’ve always assumed there’s a huge group of players attempting to become CEOs from which only a very few succeed. Sort of like assuming that actors do very well because all the actors I can name are famous (except most CEO-wannabes’ day jobs pay *considerably* better.)

other BrianFebruary 22, 2013 at 4:04 pm

I’d be interested in an analysis of the two wage effects where elasticity is not a binary variable…

tjrFebruary 22, 2013 at 4:30 pm

My understanding is that small disemployment effects of minimum wages can imply also negative slope of labor supply curve. And to be honest, the assumption that the supply curve at minimum wage levels would have positivie slope is odd, to say the least. If you give a raise to a poor man who is working two minimum wage jobs just to stay alive, do you really think he is going to take a third job just because he is earning more?

joanFebruary 22, 2013 at 4:55 pm

2/3 of minimum wage jobs are part time so it is likely that employers would reduce the number hours worked rather than lay off workers.

MichaelFebruary 22, 2013 at 4:56 pm

Before we answer this, are we to assume that the labor market has a standard downward sloping labor demand curve and a standard upward sloping labor supply curve and that the labor market clears at a single equilibrium market wage?

Because if we are, I think we may end up with a garbage in / garbage out problem.

Increasing the size of the labor force is not the same as regulating the price of labor. Even if you assume perfectly inelastic labor demand if you increase the size of the labor force you are also increasing the size of the market and thus could (at least in theory) be shifting both curves in unison so that the inelastic demand curve shifts rightward so does the supply curve and the price remains unchanged, even as a price floor on labor would result in identical quantities demanded.

LordFebruary 22, 2013 at 5:00 pm

Or not so inconsistent. It isn’t that difficult to believe employment is inelastic in the short term and elastic in the long term. Nearly everything is.

Paul RainFebruary 22, 2013 at 5:15 pm

Interesting. But there are likely to only be a few, outside the political classes, who actually believe these two precepts work in isolation.

Of course a minimum wage enforced on Americans who belong in the USA will reduce the amount of capital invested in American labour.

But the illegal immigration that is advocated by the American political classes circumvents that. Low-skilled wages thus arrive at the level which they would do in a society with an unregulated labour market. Meanwhile, the costs from unrestrained population transformation fall on the middle-classes, the only people who could theoretically maintain a civilized republic with universal suffrage.

j rFebruary 22, 2013 at 5:23 pm

Perhaps it’s just that the minimum wage is almost never all that much higher than the reserve wage. The empirical effects of raising the minimum wage tend to be minimal, because the minimum wage tends to be minimal. If, on the other hand, you tried to institute a so-called living wage, you’d likely see much more drastic employment effects.

And, yes, immigrants inhabit the low-skilled sector, but how often are they directly competing with native-born low-skilled workers. Most of the time I see immigrants working in fast food, say, it’s a family-run shop. And I don’t see many native-born folks working on landscaping crews or as day laborers. The sort of manual labor that immigrants tend to do is generally well above minimum wage.

chuck martelFebruary 22, 2013 at 5:54 pm

Fifteen years ago if you offered one of the guys hanging around a Home Depot parking lot in Mesa, AZ $10/hour to help you build a fence, he’d laugh at you.

The relevant question is actually not focused solely on wages but on the standard of living (income minus cost of living): As California’s experience shows, massive low-skilled labor greatly increases the cost of living by driving up housing prices and driving down the quality of the public schools.

RayFebruary 23, 2013 at 2:00 am

Isn’t though thee key difference between CA and TX where both have immigrants, that CA has supply side restrictions (strict zoning) on housing and TX largely does not.

DismalistFebruary 22, 2013 at 8:08 pm

Speaking with Franklin Roosevelt, in a speech to the Daughters of the American Revolution: Fellow immigrants!

nsFebruary 22, 2013 at 10:31 pm

As far as I can tell, it is not inconsistent because:
*the minimum wage applies to above-the-table low skilled/entry level jobs, whereas “higher immigration” applies to a wider swath of the labor market, including sectors that have adopted black market labor. Is there really _a_ labor market that we can generalize about, or are there effectively multiple labor markets?
*this analysis blithely conflates the short term and the long term
*marginal changes to the minimum wage are rare and happen during expansion, when the ceritus paribus assumption is especially ridiculous; supply and demand for labor are rising in parallel, making the underlying elasticity less important

JayFebruary 23, 2013 at 9:38 am

One way to identify an “economist” that has become a political shrill is if they disregard elasticities and support contradictory policies.

JimbinoFebruary 23, 2013 at 10:01 am

Yes, it is in any country’s interests to invite skilled immigrants. As long as immigrants, not necessarily skilled, but potty-trained and minimally educated, are available, it makes no sense to keep up our expensive breeding programs and no sense pouring tax dollars down the rat-hole of public miseducation.

If the government can limit our liberty with minimum-wage rules, it sure as hell can limit the breeding, as China has shown. Just think of how much “welfare” we could offer the new immigrant if we put an end to pro-natalist policies.

Indeed, if I were to attempt a trip to Mt Everest or to the moon, I’d rather do it with an immigrant than with a breeding pair or an economist.

CFMarch 20, 2013 at 2:50 pm

As for the idea that sticky nominal wages can be characterized as a worker-imposed minimum wage (comments on that entry are now closed, so I’m putting it here): isn’t it obvious that sticky nominal wages are not primarily a result of worker imposition? It’s not like the worker goes to his boss and says, if you cut my wages, I’ll quit. It’s more like the boss thinks, hmm, it would be nice to cut everyone’s wages, but they’d feel that as an insult and morale would decline, productivity would go down, and I’d be worse off than if I’d just waited for inflation to erode them instead. Sticky wages are a product of culture, human nature, good business, not workers refusing to work.